Retail sales increased 1.3% in October, beating expectations

Retail sales increased at a brisk 1.3% pace in October, topping estimates for a 1.0% increase. Core retail sales, excluding automobile and gasoline sales, expanded by a solid 0.9% for the month.

The message? Consumers are still spending; that’s the good news. The fact that too much of that spending is necessary just to maintain their living standard as inflation chews away at real purchasing power should dampen enthusiasm of how good that news really is.

A 4.1% surge in gas station sales illustrates that point, given higher gasoline prices. Nobody will point to that as a sign of consumer spending strength, as it saps potential discretionary spending elsewhere.

Sales growth over the past year also captures the point. In a different environment with stable prices, an 8.3% 12-month increase in sales would suggest strong real economic growth. But with the consumer price index up 7.8% within that same period, the year-on-year increase in retail sales looks much more tepid.

With labor conditions cooling and wage growth easing, how are consumers continuing to fuel spending? First, there are indications that the massive stockpile of cash accumulated during the pandemic is being chewed down. The personal savings rate dropped to 3.1% in September, very near the lowest rate since 2007. That could carry spending forward through inflationary headwinds for a while. On the whole, that’s not an option for lower-income households, who have already largely exhausted the stimulus payouts and are turning to credit to bridge the gap. Consumer credit expanded at a 6.8% annualized rate in the third quarter, but revolving credit (which includes credit cards) surged at a 12.9% annualized rate during that period.

In the near term, this bodes well for a solid holiday shopping season for retailers and may be particularly good news for traditional bricks-and-mortar stores that could benefit from increased traffic and less focus on social distancing than in the past few years. With measures of consumer sentiment still very low, households are likely to pare back their spending at some point. For now at least, that’s not the case.

The bottom line? Consumers are still spending, but flagging income growth isn’t driving consumption. Increasingly, households are tapping into savings and pulling out their credit cards to finance their spending habits. Either can provide a short-term bridge, but neither are long-term solutions.